FDI=FPI?

After 3 committee reports & 5 years of pontification – the government of India has finally moved to simplify foreign investment limits in the country. Arun Jaitley says FDI is now equal to FPI. Payaswini Upadhyay studies the implications, especially for protected sectors like banking, defence & retail.

Arun Jaitley, Finance Minister On 28th Feb’15“To further simplify the procedures for Indian Companies to attract foreign investments, I propose to do away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, and replace them with composite caps The sectors which are already on a 100% automatic route would not be affected.”

That announcement by Finance Minister Arun Jaitley will go a long way in de-confusing India’s foreign investment policies. Currently some sectors allow 100% foreign investment, portfolio or strategic, under the automatic route. In others like banking the total foreign investment limit is 74% but portfolio investments are capped at 49%. Why even in credit information companies – the overall limit is 74% but portfolio investment is capped at 24%

Partner, NDA“Let’s say if the foreign investment limit was 49% or 74%, if the foreign portoflio investment was restricted to 23%, even if FPIs were interested to invest further, you couldn’t have. And if the FDI investment was not available for that sector, there was an artificial shortage created for foreign investment availability. So all of this will get sorted if you provided a composite cap and remove the artificial distinction currently.”

Akash Gupt

Leader- Regulatory Services, PwC“The intent is not to merge or collapse these windows and as the FM had mentioned in the speech as well that the concept of composite cap will apply to sectors where there is an FDI cap and it’s not a new concept. Look at sectors like telecom, broadcasting and recently in defence and insurance, the principle of composite cap has been adopted and the objective seems to be to bring simplicity in the way foreign investment cap is to be calculated in sectors where there is either a conditionality or an approval requirement or there is a limit on the foreign ownership.”

There are some clear beneficiaries of this new announcement. In banking for instance, the Axis Bank stock rose 8% the day after the Budget, on the promise that the portfolio investment limit for the sector will increase from the current 49% to the total foreign investment limit of 74% giving portfolio investors more headroom to buy the company’s shares. In the power exchange sector the foreign investment limit is 49% but FDI is capped at 26% leaving FPI only 23% room.

"For banking, even though the total foreign investment limit was 74%, that is restricted for the FPIs to 24%, then going up to 49% with Board approval and beyond that, you couldn’t go. So there is headroom in most banks for further foreign investment and with the removal of the restriction, the banks can get the investment via the FPI route.”

But this effort to simplify foreign investment limits has also raised new complexities for sectors like Multi-brand retail and pharmaceuticals! In all these sectors foreign portfolio investors will be able to avail of only the automatic limits or the limit sans conditions.

Akash Gupt

Leader- Regulatory Service, PwC“There are sectors like Brownfield Pharma which may not have a sectoral cap but have conditionalities. So, how would the government keep in mind that that if an Indian pharma company is attracting more FII investment, say more than 26%, then will it need to comply with all those conditions that a foreign company needs to when making an acquisition? That would make it difficult for Indian pharma companies to raise money on stock exchange and that headroom would come with some sort of sacrifice and these are some of the aspects that the government may need to look into from a practical standpoint to make it more effective.”

Vivek Gupta

Partner, BMR Advisors“You take a sector like multi-brand retail. Today investment in multi-brand retails is allowed only with certain conditionalities and therefore under automatic route, investment in multi-brand retail is 0%. However, under the general dispensation of Schedule II, 24% FII investment can be permitted in listed multi-brand retail companies. So once they notify a composite cap, it'll be essential for them to take one composite cap where the existing FII investment is not affected. So multi-brand retail is an example where there will be straight implementation issue.”

Matters are more complex for companies in the defence sector. Last year the Modi govt permitted foreign direct investment upto 49% but with prior Government approval. The policy did not allow FPI investment in companies holding a defense license. Existing portfolio investments were capped and fresh investments not permitted. If now a composite cap is allowed for defense then it will open the door to fresh FPI investments. But only up to the automatic limit of 26%.

Defence, multi-brand retail and pharma – more clarity will emerge for these sectors once the Budget announcement takes the shape of a detailed policy circular. The hope is that the action is in line with the intent of facilitating ease of doing business in India.